It’s Time For Fintech To Look Beyond Lending And Build A Niche: Xponentia Capital’s PR Srinivasan

Mumbai-headquartered private equity firm Xponentia Capital Partners is inching towards the final close of its second fund (Xponentia Opportunities Fund II) with a corpus of over $125 Mn (INR 1,000 Cr) said the partner and cofounder of the fund, Perumal R Srinivasan, on the sidelines of the Inc42’s MoneyX conclave held last month.   

In July 2022, the PE firm concluded the first closure of its Xponentia Opportunities Fund II after securing INR 365 Cr ($44 Mn) from limited partners (LPs). For the final close, it was planning to raise an additional INR 750 Cr ($90 Mn) by December 2022.

The veteran investor said that the second fund, which is seeing an increased interest from limited partners, has so far made four investments in the EV, healthcare, and consumer tech segments. 

Xponentia Capital was founded in 2018 by Ajay Relan of CX Partners, Perumal R Srinivasan (the former managing director of Citigroup Venture Capital Partners), and Devinjit Singh (formerly with Carlyle Group). Some of the prominent names in its portfolio are EV startup Alto Green, D2C firm Souled Store, fintech company Auxillo Finserv, and Barbeque Nation, among others.

Speaking with Inc42, the cofounder of Xponentia Capital highlighted how he chooses to invest in a particular founder. He said that he is always eager to understand an entrepreneur’s risk management approach – once impressed, Srinivasan invests.

Inc42: When is Xponentia Capital planning to close its second fund? How many investments is the fund looking at? 

PR Srinivasan: Xponential Capital is a five-year-old investment firm. We concluded our Fund I in 2019 at INR 350 Cr. We are currently raising for Fund II (Xponentia Opportunities Fund II). The first close of the current fund (Fund II) was marked at INR 356 Cr in July last year. We hope to close this fund at INR 1,000 Cr. 

From Fund I, we made eight investments, and from Fund II, we have made four investments so far — two this year and two last year. 

Inc42: Are you witnessing any slump in deal flows? If yes, has it changed anything for you when it comes to looking at growth stage companies? 

PR Srinivasan: We are a growth and mid-market investor. So, we invest in companies that have gone past the proof of concept stage and back the businesses with viable unit economics with the potential to scale. 

Unlike the early stage market, which seldom sees a summer, we are not witnessing any winter in growth stage deals. However, we are back to operating in the same zone and climate as two years ago.

We typically try to do four deals a year, and we have already invested in two companies so far this year. Hopefully, we will end up investing in two more companies by the end of this year.

Inc42: Which are Xponentia Capital’s key investment arenas?

PR Srinivasan: We invest a lot in financial services. We also focus on securing consumer and healthcare deals. Not only this, but we also grab deals outside these sectors.

So, in my portfolio, I also have an EV company, Alti Green. It is a Bangalore-based company that makes electric three-wheelers. We also have one company that doesn’t fit in any of the sectors mentioned earlier. So, we do deals opportunistically. However, a majority of our portfolio comprises startups operating in the financial services, consumer and healthcare sectors. 

Inc42: Many Indian fintech startups were recently seen pivoting to other business models due to regulatory headwinds. How do you look at the current times?

PR Srinivasan: One can argue that the regulator should have allowed the sector some cushion before tightening its noose. You can also argue that the regulator did not give the industry enough time to grow or mitigate its losses, but this is how things are in India. 

I think what is happening in the Indian fintech ecosystem today is that everyone wants to enter the lending business because it is the only place where money is being made, posing both challenges and opportunities before companies operating in the fintech space. 

On the other hand, if startups can figure out how to create a niche, operating on par with large banks or small NBFCs, people will be willing to pay and use your solutions. Unfortunately, many today have failed to create such a niche and have pivoted to lending as a result. 

Inc42: Corporate governance has become a significant focus, particularly for growth and late stage companies. Are you currently proactively engaging with the founders of your portfolio companies on this matter? 

PR Srinivasan: We are not seeing many governance issues emerging at the mid-stage. However, there are always two sides of a coin.

The key problem area is companies engaging in multiple rounds of funding. Now, if a company raises money every six months, it’s easy to hide things. Simply put, new money helps you hide old mistakes. Before an investor gets to know about an aberration in a particular company, the firm has already raised money in multiple rounds — Series E, Fand so on. Interestingly, we recently saw a Series H funding round. 

The trend of multiple funding rounds with soaring valuations put the onus on founders to deliver, breeding corporate governance issues. 

However, the industry too should be blamed for this and not just promoters. Lately the entrepreneurs involved in frauds have been in limelight, but there are many good founders out there who aren’t getting noticed. 

Meanwhile, we also need to understand that during down cycles, it is natural to see skeletons falling out of closets, and this is nothing new. 

Inc42: Despite challenges across the board, you look quite bullish when it comes to investing. How do you play your cards?

PR Srinivasan: We don’t see any problem in deploying the capital that we have raised. We have a lot of deals, opportunities, and mature entrepreneurs who understand this. 

When I meet founders, I am more interested in understanding their approach towards solving risks. If I end up liking a founder’s risk mitigation plan, I invest. 

Inc42: During Inc42’s MoneyX conference, numerous investors discussed the merits of adopting a patient capital approach rather than conforming to the prevailing trend of hastily exiting from loss-making companies. What is Xponentia Capital’s current strategy in light of these times?

PR Srinivasan: If there are problems, we have to wait for the right time to monetise, and I am fully aligned with that. Patient capital is not a buzzword, it is what I’ve been doing for the last 30 years and intend to do for the next 10 to 15 years.

We manage third-party money and have responsibilities. The people who invest in my funds are my customers and not the entrepreneur. However, we really want entrepreneurs to succeed because when they succeed, we succeed and my investors benefit. So, that’s the way we like to engage with these things.